Motley Fool Hidden Gems Investing - Interview with Karooooo CEO Zak Calisto

Starting point is 00:00:00 when i tried to get karu.com there's someone in america that owns a warehouse and it's karu.com so you wanted 10 million dollars for the name and i said okay that's fine you you know i'll keep the money you keep the name and i'll just do it from three till nine hours we own all those Career.com. That was Zach Callisto, CEO and founder of Career. And yes, that's Career with five O's. I'm Motley Fool producer, Matt Career. Now Career provides a software platform for connected vehicles. It's a platform that helps with fleet management, logistics, and safety. Motley Fool co-founder and CEO, Tom Gardner and Motley Fool analyst, Emily Flippen recently had a chance to talk with Zach Callisto about the business of Carew. Well, hello, Motley Fool

Starting point is 00:00:57 investors. We're so excited to spend the next hour or so with Zach Callisto, the founder and CEO of Carew, which is probably how it's often introduced. And people are always, I'm sure, wondering about the name, which we'll get to in a second. It's a fun story. But I'd really love to just start and Emily flip in here as well. Tom Gardner, both of us have recommended the stock. It's been recommended a number of times now in the Motley Fool to our members, and we're so excited to get a chance to spend time with the CEO and hear your thoughts. Zach, and I'd love to just hear the origin story, if you would. What was the moment you realized you wanted to start this business, and how has it developed since inception? I had a vehicle stolen from me in around 1994.

Starting point is 00:01:43 1994 at that point in time um someone i knew brought some technology to south africa adopted it and they started the track and trace uh company to recover stolen vehicles that's how the business actually started i became one of the agents to sell on their behalf and i ended up selling about 80 percent of their sales i rolled out quite a big network yeah in 96 97 they asked me if i would They helped them open up the geographies in the neighboring country, South Africa, which I did. And in 1999, they asked me if I wanted to go do a joint venture with them in Brazil. I went to Brazil. I said, it's a great market, but you'd need to redevelop your technology because the unit economics won't make sense there.

Starting point is 00:02:32 They decided it was too expensive to develop the technology, so I developed it myself and entered negotiations still to go to Brazil with them and then we didn't reach agreement which then led me to sell all my interests in in the the previous agency business and I then decided instead of going to Brazil it's much easier just to start in the markets that I know so I had the advantage of knowing what not to do in 2004 we went to the market also a very simple solution of track and trace and in 2007 we decided we've got a lot of corporate customers that need more than just track and trace we went into fleet management and it's been you know the a total building that play with the current platform from the ground up and today our

Starting point is 00:03:24 platform is much more than just fleet management as well and if we look back to 20 years ago what we had and what we've got now is really, we're in a very different space. You know, that's sort of my life story. I've always loved that story. In fact, when I first started researching career after you in public, just a handful of years ago, I went to one of the analysts here on our investing team who was actually from South Africa. And I said, have you heard of CarTrack? Talk to me about this business. And he says, yes, you as Americans oftentimes don't understand just how pervasive car theft is and vehicle hijacking in geographies, including South Africa. So it's something that really appealed to consumers. But talk to me about how your business exists

Starting point is 00:04:04 today, because making that transition from consumers to full telematics and fleet vehicle management has opened up a lot of opportunities for you from changing a business, from just sticking a device onto a car and saying, we're going to track that to you to being like, how can we be this vertically integrated solution that includes hardware and software? When you look at your business and how it breaks down in this moment? How much of that is consumer versus how much of that is enterprise? And where do you see growth from here going? And like I said, we started in South Africa, very much track and trace. In 2007, we started enhancing our platform to be able to do with fleet management so that we could service our commercial, our enterprise

Starting point is 00:04:44 customers better. Today, approximately 50% of our business in South Africa is commercial business, 50% is consumer and South Africa today constitutes 70% of our subscription revenue of our group and 30% of the subscription revenue outside South Africa that's enterprise business in Europe and in Asia so in total you're probably looking at at this point in time about a third of our business is a consumer and about two-thirds of our business is commercial customers clearly what we do today we do we do our we got a tremendous amount of business intelligence reports live alerts we do we push and pull data through apis into our customer systems we have very complex solutions for different customers depending what industries they're in they we service customers whether they

Starting point is 00:05:45 logistics whether the ambulances were they doing cold storage whether they're moving by a waste you know it just it's an endless amount of industries that we serve and the reality is we continue to develop this platform because as we get closer to our customers as we develop more we realize it's just endless challenges that the customers face from being able to either transport goods or transport people and from the whole supply chain it's addressing all of that so i believe we still have a very long way to do development as we get closer to our customers and i would say the fleet management portion of the business we probably had that done in about 2012 in a very comprehensive now it's everything that lies on top of that fleet management business

Starting point is 00:06:35 You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with a delicious Pret organic coffee? Starting at just $1 all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. We actually have built an AI-powered scoring system for public companies, mostly U.S.-listed, but increasingly we will be moving to evaluate companies around the world. And you have one of

Starting point is 00:07:14 the highest financial scores of any public company, certainly of any small-cap public company. You also have a ROUNTA, which is an acronym for Return on Unlevered Net Tangible Assets, which is something that Warren Buffett has written about in past shareholder letters, essentially evaluating how much operating cash flow you can draw out of your physical asset base. and the round to accrue is about 35%. Bob, it says, you know, I like it when it's above 25%. So all of the financial metrics are outstanding. And I'd love you to, let's go to the rule of 60

Starting point is 00:07:46 because we've heard rule of 40. I'm even wondering when we'll get to rule of 90 at Kuru, but tell us what level you're at now and what that represents to any viewers today that aren't familiar with that concept. I haven't got the exact maths with me. And the reality is as I get older, pay less attention to the nitty-gritty of all these calculations and i'm more worried about the

Starting point is 00:08:09 the welfare of the business but i i believe it's just a combination of your you know your your growth margin your evertime margin and you add the two and you get to 60 so the reality is that we have got a very profitable business generating really good and operating cash flows and our growth rates are what I would consider very healthy. But given the cash that we generate, the free cash, which I would like to allocate that cash into the business to grow even faster, if that makes any sense. The reality of it is that we want to grow faster, but given the way we approach our capital and our exposure to risk, it sort of slows us down a bit at times. and perhaps it's given my age.

Starting point is 00:09:00 If I was a younger lad, 30 years old with 20 good degrees, I'd probably throw cash at it. And if it didn't work, I'll just start a new venture next week. Just a quick follow-up on that and actually taking it in a direction because I know, Emily, we want to ask a couple of financial questions, but just to take it in a direction about you and your leadership, rule of 40, generally revenue growth rate plus profit margin should be greater than 40%.

Starting point is 00:09:23 your rule of 60, which is an indication of unbelievable levels of profitability, extremely high retention rates. But I just wanted to jump in on what you shared about, you're getting older, other people are in the nitty gritty, you're looking at the broader vision. Can you talk a little bit about your style as a leader? We run a basic sort of Myers-Briggs-like methodology at The Motley Fool called the Synergist Quiz, which distinguishes four different traits for each of us. And of course, we have capabilities in all four, but one of them is to have a lot of ideas. Another is to get things done on time. Another is to build systems and another is to be a people sort of unifier. And so I'm wondering where you, I'm

Starting point is 00:10:02 assuming you have a high vision or idea generation score. I don't know, but how do you, how do you view yourself and work with your team? Because when you say you don't get in the nitty gritty details, having listed your quarterly conference calls, your presentations are outstanding. You know, you obviously have a team that gets into the nitty gritty very well and I enjoy them a lot, But can you talk about your leadership style relative to the team that you've built? This might sound like I'm contradicting myself. So I am a man of detail. But, you know, you've got to focus on the detail that really matters for the health of the business.

Starting point is 00:10:33 So when it comes to working out the rule of 60, I don't think that's that important for me to determine whether the business is healthy or not. So I just wanted to clarify why that's detail that might not be that important to me, if that makes sense. uh you know this is detailed it's a byproduct actually i think i'm quite detailed but you know at the same time in a healthy way otherwise you could get lost in the analysis paralysis and you know you into everything matters and at the end of the day you're not making the decisions that's important i think my forte is building teams understanding people understanding what people are good at and understanding people that will not be a culture fit for us and I think that's one of my strengths is building teams I also think I'm quite pedantic at building products

Starting point is 00:11:28 and to make sure they work and that the customer is getting the best service possible and I'm also very pedantic about making sure we've got control about the full value chain of our operations and which implies customer service so it's very much about making sure we vertically integrated making sure we've got a great culture and making sure it's we're building the right teams because at the end of the day we're in the business of building teams if you can't build the teams you're not going to have a good business you might have a big business but it might not be a good one if that makes sense so that's more my management style great teams great product, and then pay attention to the way you spend money.

Starting point is 00:12:14 It's beautifully said. And actually, I love your commentary around the details that do matter versus the details that don't matter. When you get into stock research and analysis, you can drown in facts and figures. And 99% of the stuff you come across probably doesn't actually matter to the success of the business. The hard part is finding the little bit that does. And one of the things that has really mattered to me in my research for Grew, going back to your financial profile has been the return on investment that you get from virtually everywhere that you put your capital. And in some ways you run this business like an old business. You can tell it was built up in the nineties. Um, you pay a dividend and you're very disciplined when it

Starting point is 00:12:50 comes to capital allocation. But at the same time, you know, when I look at these return on investment metrics, I think to myself, I am 30 years old. I would love to be throwing capital everywhere I could in this business, but it's a pretty CapEx intensive company. So you haven't gone out and raised a lot of debt and raised a lot of capital in order to expand really aggressively. And do you intend to maybe change that moving forward as you get success in the new geographies or slow and steady really win the race here? I think the reality is this, Emily, if I could have it my way, I'd be growing at 300% per

Starting point is 00:13:24 annum. Does the market exist to grow at 300% per annum? Yes, it does. It's all about execution. and then it's all about execution and keeping your culture so that it's sustainable because you can go out there grow at 40 50 percent and then you say you're going to become profitable later and you might never ever become profitable because your customer retention might not be there the minute you want to contain costs then staff will leave you because they've been used to

Starting point is 00:13:50 you know they've been used to not a disciplined environment they've been used to earning too much money so it's always tricky to then cut back later so we stick into the way we're doing things but I'm not against raising cash and getting debt and issuing shares but we'll do that when we find that our free cash flow is not sufficient and I would love to be in a situation where we're raising cash so that we can grow faster but not just raising cash so we can throw cash edit to grow faster you gotta try breakfast at a and w you gotta try breakfast at a and w and what better way than with a delicious pret organic coffee starting with just one dollar all day every day now until december 31st

Starting point is 00:14:49 you gotta try breakfast at a and w at participating a and w locations in ontario I'd like to hear about new technologies, the impact they're having in your category and how you're approaching them. Autonomous driving and AI, take them in any order you'd like to. What do those mean to you and to Kuru? So AI, you know, it's a word that everybody's using now, as you well know. It's a word that can mean a lot of things to a lot of people, to different people. But in our space, AI is really about machine learning. It's the ability to get all that data and all those data points and stitch it together and do predictive analysis on that. So we've got AI on, for instance, we do a lot of AI for the banks where we can sort of

Starting point is 00:15:42 predict potential customers that won't be paying their bill. And we have that sort of technology and we're onboarding more and more banks as they see how reliable our data is. We've got it on the video telemetry. We've also got it on the latest tag unit. There's quite a lot of algorithms there, a lot of data collecting points, which we can, at that point in time,

Starting point is 00:16:08 also prevent a fraud that's about to happen or bad behavior, other bad behavior that's about to happen. And that's just because of our experience and the amount of data that we have. And the speed that we can process that data allows us to do all, you know, all these type, you know, I don't like to use the word AI because it's very generic and, you know, I'm not sure if it's to write a letter or we're more in the algorithms to see, you know, we're less in the arts,

Starting point is 00:16:38 we're more in the mathematical space, in the scientific space. And that is really just about being able to have all these data points, bringing it together, making its entails out of it and being able to predict potential and mitigate risk fundamentally. That's what it's all about. Mitigate risk and prevent costs for companies and optimize things as well. You may have heard that in the last call, Tesla began to really emphasize autonomy for their entire business. We expect that some of the difficulties we're going through and all of the things that Elon Musk is involved in,

Starting point is 00:17:14 the bet that they're making is autonomous vehicles and optimists, you know, autonomous robots in our daily lives. What does autonomous driving mean for Carew? It's a very good question and I'm not certain that I have the wisdom to answer you because, you know, in the time that I've been in the industry, I've been in the industry since 1994, there's been so many things that have come and gone and they didn't happen or they didn't happen the way we thought they were going to happen. But fundamentally, if I were to answer that question, I would say there's a few aspects. The first thing is, when will autonomous vehicles be, when will it all be autonomous vehicles in places like Southeast Asia, South Africa, Europe? How long will that take? That's the one part of

Starting point is 00:18:07 the question. The second part of the question, the second part to the question would be that, you know autonomous vehicle only replaces the driver it doesn't replace the chores the jobs that things that need to be happen to happen so does it mean that if you now don't have a driver you no longer need a management system if that makes sense and i i think you if you remove the driver you've got less risk of bad behavior by a driver but the whole management system is still relevant and especially as we get closer and closer to our customers and we're more integrated with our customers into their daily operations then i believe it really just is a replacement of the driver but i don't want to oversimplify it because you know it's very difficult for me to know

Starting point is 00:19:00 what the landscape is going to look like in 20 years time but what i can say is we are agile in our thinking. There's a lot that's going to happen in the next 20 years. And, you know, we will work our way through all the different things that could happen. Can you tell us about the Karoo region in South Africa? Well, it's a semi-arid region, a bit like Arizona, but I thought the Karoo was the most beautiful place on earth until I went to Arizona. So it might've been Arizona with five A's on the end.com. Had you traveled to Arizona before? No, it actually, I started with Karoo because I really liked it. But the reality with the O's is that when I tried to get Karoo.com, there's someone in America that owns a warehouse and it's Karoo.com. So you want

Starting point is 00:19:48 the $10 million for the name. And I said, okay, that's fine. You know, I'll keep the money. You keep the name and I'll just do it from three to nine O's. We own all those Karoo.com. But you don't own 10 Os. You don't own 10 Os. I think we might. Actually, we might. We might. That was Carew's CEO and founder, Zach Calista. The stock trades on the NASDAQ under the ticker K-A-R-O. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley full editorial standards and is not approved by advertising. Advertisements are sponsored

Starting point is 00:20:32 and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Matt Greer. Thanks for listening, and we will see you tomorrow.

Motley Fool Hidden Gems Investing - Interview with Karooooo CEO Zak Calisto

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